DSS, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 30, 2020. This is an annual report, not a standalone fourth-quarter report. DSS makes security printing, packaging and plastic-card products, sells digital authentication and IT services, and historically pursued intellectual-property monetization.
Financial results and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $19.41 million | $18.52 million |
| Operating loss | $2.88 million | $1.71 million |
| Net income (loss) | $(2.89) million | $1.46 million |
| Net income (loss) per share, basic and diluted | $(0.11) | $0.09 |
| Cash used in operating activities | $5.34 million | $1.38 million |
| Cash used in investing activities | $3.98 million | $1.10 million |
| Cash provided by financing activities | $7.97 million | $0.49 million |
- Revenue increased about 5%. Printed-products sales rose 1%; technology sales, services and licensing rose 36%, including an approximately $642,000 increase in AuthentiGuard sales. Direct-selling revenue was $172,000, with none reported in 2018.
- Gross profit was approximately $6.81 million, or 35.1% of revenue, versus $6.66 million, or 36.0%, in 2018. Cost of revenue rose 6%, mainly due to paperboard and outside-service costs.
- Operating expenses increased 10% to $22.29 million. Professional fees rose 85% to $1.99 million, chiefly from IP litigation, corporate legal work and diversification costs. Selling, general and administrative compensation fell 3%.
- The 2018 profit included a one-time $3.53 million net gain on extinguishment of liabilities; no comparable gain occurred in 2019. Excluding that item, the year-over-year net-income comparison is less favorable than the headline figures suggest.
- At year-end, cash was $1.10 million, current assets $7.48 million and current liabilities $4.16 million, implying working capital of about $3.32 million. Total assets were $20.14 million and stockholders’ equity $12.30 million.
- Reported borrowings included $500,000 on a revolving line, $441,000 current long-term debt and $2.31 million long-term debt. Lease liabilities were an additional $1.22 million. Debt balances exclude lease liabilities.
- 2019 financing included approximately $6.66 million net proceeds from common-stock issuance, as well as credit-line borrowings. The company reported spending approximately $989,000 on capital expenditures, $1.83 million on an investment and $793,000 on notes receivable.
Changes, outlook and material matters
- Strategy: A November 2019 plan prioritizes reviving core businesses, reducing overhead and cash burn, winding down IP monetization in an orderly manner, and diversifying. Management said monthly cash burn had declined by more than $160,000 since spring 2019; it estimated the IP-business exit would take 18–24 months, while honoring existing commitments and adding no new patent investments outside targeted product needs.
- Liquidity and going concern: The company reported negative operating cash flow in 2019 and relied on equity offerings. It raised about $5.0 million net in a June 2019 offering and about $4.0 million net in a February 2020 offering. Management said year-end cash plus the February proceeds were expected to fund planned operations through March 2021 and concluded substantial doubt about going concern had been alleviated. This outlook depends on execution, cash use and access to capital.
- Guidance: No formal consolidated revenue or earnings guidance is provided. DSS projected AuthentiGuard sales growth of approximately 17% annualized over three years, from annual sales of about $1.5 million. This is a company projection, not a reported result.
- COVID-19: The filing says the pandemic could disrupt supply chains and operations and adversely affect estimates, inventory and asset values; management could not reasonably quantify the impact. Manufacturing facilities were operating as essential businesses at the filing date.
- Litigation: In February 2020, a court entered final judgment of non-infringement for Apple in a major DSS patent case; DSS said it intended to appeal. Other patent disputes remained pending or stayed, with some patent claims found unpatentable by the PTAB. Intel and Apple also sued DSS Technology Management, alleging antitrust and unfair-competition violations. Potential adverse outcomes could materially affect results, cash flows or financial condition.
- Other subsequent events: DSS disclosed a proposed Impact BioMedical acquisition with consideration capped at $50 million, subject to due diligence, valuation and approvals; and a medical real-estate venture involving an $800,000, 8% promissory note. It also reported foreclosure on RBC notes receivable, taking assets instead of converting the notes, and a further approximately $460,000 investment in an entity associated with a director.
- Concentration and related parties: Two customers represented 45% of 2019 revenue and 49% of year-end receivables. Chairman-controlled entities participated in equity financings, and DSS exercised part of a warrant to invest approximately $1.83 million in Singapore eDevelopment (SED), where the chairman is CEO; DSS held about 7.1% of SED at year-end.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2019, citing insufficient qualified accounting staff/segregation of duties and inadequate systematic documentation of monthly close and reconciliations. Remediation was underway but not yet fully tested. The independent auditor issued an unmodified opinion on the financial statements; it did not audit internal-control effectiveness.
Investor verification priorities
- Confirm the company’s subsequent cash position, operating cash burn and funding needs against the March 2021 runway estimate.
- Track core-segment revenue, gross margins and AuthentiGuard growth, and whether cost reductions translate into improved operating performance.
- Review the status, costs and potential financial exposure of the Apple appeal, remaining patent litigation, and the Intel/Apple antitrust case.
- Verify conditions, approvals, consideration, dilution and related-party safeguards for the proposed Impact BioMedical acquisition and medical real-estate arrangements.
- Assess customer concentration, collection of receivables, and the recoverability and valuation of investments, notes receivable and assets received from RBC.
- Monitor remediation and testing of material control weaknesses, and confirm whether management reports controls effective in a later filing.